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CASE IN POINTVOL. III IV APRIL 2016
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Foreword
It is gives me immense pleasure to present to you the thirteenth issue of Case in Point, a quarterly update on the recent legal developments in the field of Dispute Resolution.
In the present issue, we have examined the implications of the Model Bilateral Investment Treaty (BIT), which was recently approved by the Central Government in an attempt to strike the right balance between the rights of the Government and the rights of the investors as opposed to the pro state 2015 Draft Model BIT. The adoption of the Model BIT is a significant step to project India as a preferred destination for foreign direct investment which will form the basis for India’s future treaty negotiations, including the renegotiation of some of its 83 existing BITs.
Among the recent case laws, we have analyzed the decisions of the Supreme Court in the case of (i) Madras Petrochemical Ltd. and Ors v. BIFR and Ors., wherein the Court while adjudicating on the interplay between SICA and SARFAESI held that the new legislative scheme under SARFAESI should be given precedence over SICA and that a secured creditor of a sick unit can invoke Securitisation Act (SARFAESI) notwithstanding SICA. The court laid down guidelines when the secured creditors who have separate claims cannot agree on recovery from the sick unit; (ii) Vishal N Kalaria v. Bank of India & Ors. wherein the Supreme Court held that the provisions of SARFAESI will not override the provisions of the Maharashtra Rent Control Act, 1999 and that a tenant cannot be arbitrarily evicted using SARFAESI Act, for it will be a violation of Rule of law and would also render a valid Rent Control statute useless and nugatory; (iii) State of Rajasthan and Ors v. Gotan Lime Stone Khanji Udyog P. Ltd and Ors. wherein the Supreme Court expanded the doctrine of lifting of corporate veil and applied it to transactions where transfer of mining leases were involved; (iv) Reserve Bank of India and Ors v. Jayantilal N. Mistry and Ors. wherein the Supreme Court held that RBI and other
Indian banks cannot deny information to the public on the grounds of economic interest, commercial confidence and public interest.
We have also analyzed the decision of the Delhi High Court in the case of Commissioner of Income Tax v. Subrata Roy, wherein the Delhi High Court has held that the sum received by a partner of a firm cannot be deemed as dividend under section 2(22)(e) of the Income Tax, Act 1961 even if such firm is indebted to his company.
The issue is concluded by a section on other legal updates in the field of dispute resolution.
Feedback and suggestions from our readers would be appreciated.
Please feel f ree to send your comments to [email protected].
Regards, Cyril ShroffManaging [email protected]
1. Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 02
2. Bilateral Investment Treaty . . . . . . . . . . . . . . . 03
3. Madras Petrochemical Ltd and Ors v. BIFR & Ors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 08
4. Vishal N Kalaria v. Bank of India & Ors . . . . 11
5. State of Rajasthan and Ors v. Gotan Lime Stone Khanji Udyog P. Ltd and Ors. . . . . . . . . . . . . . 14
6. Reserve Bank of India and Ors v. Jayantilal N. Mistry and Ors. . . . . . . . . . . . . . . . . . . . . . . . . 16
7. Commissioner of Income Tax v. Subrata Roy. 18
8. Legal Updates . . . . . . . . . . . . . . . . . . . . . . . . . 21
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INTRODUCTION
After liberalization in 1991, India has become one of the top destinations for foreign investment and currently is one of the fastest growing economies in the world. The ease of doing business depends largely on a country’s ability to recognize and enforce rights- whether that of investors or local players. India has recently released its model Bilateral Investment Treaty and is in the process of negotiating amendments to its existing treaties on similar lines. Given that a bilateral investment treaty is a reciprocal agreement between two countries in order for the host country to receive foreign investment, these amendments are a signicant precedent. The importance of favourable BIT provisions became evident in 2013, when Etihad, a UAE investor, made its investment in Jet Airways conditional on signing of a bilateral investment treaty between India and UAE. The Government’s decision to fast track the deal helped clear the way for Etihad’s Investment. Another facet of a BIT is having an efcient dispute resolution
1 mechanism in place. The White Industries Caseacted as a catalyst to spring the government into action. The present case arose from a commercial arbitration which resulted in an award against Coal India wherein White Industries attempted and failed to enforce an award in its favor. The award was sought to be enforced by White Industries in the Indian Courts. Due to the sluggishness of the Indian judicial system, the award enforcement was in limbo for about 10 years and consequently the award was set aside. This inefciency prompted White Industries to start Investment Treaty Arbitration against India under the
India-Australia BIT. White Industries used a provision, which did not exist in the India-Australia BIT by relying on a “Most Favored Nation” (“MFN”) clause in the India-Australia BIT. White was able to enforce a provision in the India-Kuwait BIT, which provided for effective means of asserting claims. An MFN clause grants an investor same rights with the host state, which the other countries have under their own investment treaties with such host state. The tribunal accepted the White Industries’ argument that the conduct of the Judiciary amounted to failure to provide ‘effective means of asserting claims’ and held that a 10 year delay to set aside the award amounted to denial of effective means.
As a result of the fallout of this case, many other investors led Investment Treaty Arbitrations (ITA) against India, making it the country with the highest number of ITA claims pending against it. The decision opened a Pandora’s box which led to about 17 other investors issuing notices of arbitration to India, which include Vodafone which was at the receiving end of a retrospective tax amendment and Telenor, whose investment in 2G licenses stood cancelled by the
2Supreme Court . Sistema was another rm to serve India with a notice under the India-Russia BIT for cancellation of its 2G license. Similarly, Loop Telecom’s investor, followed suit in connection with
3its 21 lost licenses .
In light of the growing number of investment disputes against India, the Government released a Draft Model BIT (“Draft BIT”) in early 2015 for public consultation and comments and in a signicant push
1 Final award at http://www.italaw.com/cases/documents/1170 2 Anirudh Krishnan, The Hindu, “ A bit for the state, a bit for the investor’ available at http://www.thehindu.com/opinion/op-ed/a-bit-for-the-state-a-bit-for-the-investor/article7625893.ece3 Shalaka Patil and Pratibha Jain, “Bite of BIT- The steady rise of BIT and a pro investor regime in the Global Economy”, The Journal of Chamber of Tax Consultants, December 2012.
India’s New Model Bilateral Investment
Treaty
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to improve the ease of doing business and investor condence, the government recently approved the text of the new Indian Model Bilateral Investment Treaty (“Model BIT”). The International Centre for Settlement of Disputes (“ICSID”) is at the forefront of BIT institutional arbitration. India is not a member of the ICSID Convention but the Model BIT does provide for arbitration under the ICSID Convention, Additional Facility Rules of ICSID and the UNCITRAL Arbitration Rules. The addition of ICSID as a dispute resolution forum will give the investors more exibility to resolve disputes.
MODEL BILATERAL INVESTMENT TREATY
As a result of the case and subsequent notice, the government proposed a new Model BIT to prevent the problems that India had faced because of its extant BIT regime. The key aspects of the Model BIT are given below-
1. Denition of Investment:
The denition of investment under the Model BIT is based on the enterprise model which means that an investor would have to be incorporated domestically. The Model BIT has removed the requirement of “real and substantial business” which was there in the Draft BIT. This omission has broadened the denition of investment. The denition also contains a list of non-exhaustive assets, which the enterprise may contain. It also contains a negative list, which will not be included as investment. Exclusion of goodwill and similar intangible rights might cause discontent to investors particularly those investors whose investments are based on Intellectual Property.
Pre-establishment investment means all the activities that occur during the acquisition phase are also given protection under the treaty, as is the
4case of US-Azerbaijan treaty. Pre-establishment investment has been a major thorn in the
negotiations between India and the United States with the US asking for the incorporation of the clause in the proposed India-US BIT. India would do well to add the clause as it would help in securing more investment from India’s second largest trading partner which will further strengthen the Make in India campaign.
The Model BIT has dened an investor as a natural or juridical person of a party, other than a branch or representative ofce, that has made an investment in the territory of the other party. The Model BIT states that a juridical person includes any legal entity that is constituted, organised and operated under the laws of that party and that has substantial business activities in the territory of that party or any legal entity that is constituted, organised and operated under the laws of that party and that is directly or indirectly owned or controlled by a natural person of that party.
In order to circumvent the effect of the Barcelona 5Tractions decision which provided that non-
national shareholders of a company could not receive diplomatic protection ,most modern BITs include the term ‘control’ to mean both direct and indirect control so that even remote levels of
6ownership are protected.
2. Treatment of Investments:
Article 3 of the Model BIT contains “Treatment of Investments” clause which states that investments made by investors will not be subject to measures which constitute a violation of customary international law through (a) denial of justice in any judicial or administrative proceedings, (b) fundamental breach of due process, (c) targeted discrimination on manifestly unjustied grounds and (d) manifestly abusive treatment. It is now a requirement to establish a violation of international law by showing a denial of all the four types of treatment as opposed to the Draft BIT under which the requirement to establish a violation of international law was
4 Article II of the US-Azerbaijan Investment Treaty5 Barcelona Traction, Light and Power Co., Ltd. (Belgium v. Spain) (1962–1970), Preliminary Objections, available at http://www.icj-cij.org/icjwww/idecisions.htm of 24 July 1964; and second phase — judgment of 5 February 1970 (http://www.icj-cij.org/icjwww/idecisions.htm).6 Supra at 5
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linked to establishing denial of justice only, effectively raising the standard and limiting protection under this provision only to investors who can establish the meeting of such a rigorous standard. Such an addition will help negatethe effects of not having a fair and equitable treatment clause as expanding the protection on investments to all four categories should make the investors more secure about the investments.
The standard of treatment of investments was laid down in Waste Management II wherein it was stated that that the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety-as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process. In applying this standard it is relevant that the treatment is in breach of representations made by the host State which were reasonably relied on by
7the claimant.”
Article 3.2 contains a full protection and security clause which states that the host state shall accord full protection and security to investors. The key feature of the clause is that the clause only refers to ‘physical’ security and not to any other
8obligation. In Azurix vs Argentina Corp , the tribunal took a broad view of the word ‘full’ and stated that the overall stability of the investment is very important. The Government of India’s objective to dene the term is to make the term clear instead of leaving it open to interpretation which might lead to contradictory results. While providing clarity regarding the scope of the term ‘full’ may help in resolution of disputes quickly, it may also deter investors as they might prefer to invest in countries, which provide for extra security to their investments.
3. Most Favored Nation:
MFN clause grants a covered investor same treatment with other investors who have different investment treaties with the host state. The Model BIT unlike the BIT’s of the other countries like the United States does not have an MFN clause. Article 5 of the China-Germany BIT also has a MFN clause. The removal of an MFN clause is a consequence of the negative press which was directed at India due to the award in the White Industries Case. It may act as roadblock as investors will not be able to rely on potentially benecial provisions in other BITs entered into by India. This may result in investors favoring countries such as China which has an MFN clause in its BITs with other countries. The government is playing safe as it does not want to be in a situation where it has to pay a huge price for incorporating an MFN clause. Also, this may be because the government may want to apply different standards to investors depending on the amount they invest.
4. Scope:
Article 2.4 lists down the various activities to which the treaty shall not apply. A signicant item which has not been included is taxation andthe treaty does not apply to any measure regarding taxation. This is added due tothe government’s experience with Vodafone regarding retrospective tax amendments. The treaty also does not apply to the a) issuance of compulsory licenses granted in relation to intellectual property right or the revocation, limitation or creation of Intellectual Property Rights, b) government procurement by a party, c) subsidies or grants provided by a party and d) services supplied in the exercise of governmental authority by the relevant body or authority of a party. A new exception has also been added, namely “any measure by a local government”, even further limiting the measures that will benet from treaty protection.
7 Waste Management, Inc. v. United Mexican States, Case No ARB(AF)/00/3 at para 98. Available at http://www.state.gov/documents/organization/34643.pdf8 Azurix Corp vs Argentina ICSID Case no ARB/01/12 ( 14 July 2006)
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5. National Treatment:
The national treatment clause states that each party shall accord equal treatment with respect to management, conduct, operation, sale or other disposition of investments in its territory to foreign investments as is accorded to domestic investments. The Draft BIT excluded the actions of the state governments from the purview of the National Treatment clause but the Model BIT has extended the national treatment clause even to the actions of the Sub-National governments as stated in article 4(2) of the Model BIT. The term Sub-National government has been dened in article 1(12) as a State Government or a Union Territory but not a local government whichis dened in article 1(7) as an urban localbody, municipal corporation or village level government or an enterprise owned and controlled by the same. Excluding the State Governments from the National Treatment obligation could have dampened investor sentiment. In India, the state governments have several powers which are independent of the central government including power to make laws on entries mentioned in the State list and the Concurrent list. For example only the state government can enact laws regarding law and order, therefore, inclusion of the actions of the state governments will go far in attracting foreign direct investment. The Model BIT does not apply to any actions of the local government.
6. Expropriation:
The Model BIT just like the Draft BIT covers both direct expropriation as well as indirect expropriation. Article 5.3 states that direct expropriation occurs when an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure while indirect expropriation occurs if a measure or series of measures of a party has an effect equivalent to direct expropriation, in that it substantially or permanently deprives the investor of the fundamental attributes of property in its investment, without formal transfer of title of outright seizures. The Model BIT also states the circumstances, which should be taken into
account while deciding indirect expropriation. The Model BIT apart from excluding non-discriminatory regulatory measures also excludes measures by a party or awards by judicial bodies that are designed to protect legitimate public interest or public purpose. The Model BIT gives the tribunal an implied authority to review the host State’s determination of whether a measure was taken in public interest. This move will bring cheer to the investors as the power of the state is effectively reduced.
7. Subrogation:
Article 8 of the Model BIT contains a provision for subrogation under which rights will be subrogated to a state or agency if they have paid for the same under a contract. This move will help the investors as they can now effectively transfer the burden to their state. This clause was not a part of the Draft BIT.
8. Exhaustion of remedies:
Article 15 of the Model BIT states that the investor must submit its claim before the relevant domestic courts within one year from the date on which the investor rst acquires knowledge of the measure in question and knowledge that the investment has incurred loss as a result. The investor may dispense with this provision if he can show that there are no domestic remedies available. Article 15.2 states that the investor will have to exhaust all judicial and administrative remedies for at least 5 years. This provision has a positive and a negative aspect. The positive aspect is that the investor does not have to ght the case for years in vain but the negative impact being that apart from being a vague standard, it can be seen as an additional condition precedent on the commencement of arbitration proceedings. This will burden the already overburdened judiciary as for 5 years; the party will not be able to commence arbitration.
9. Compensation for Loss:
This clause is a new addition to the Model BIT.It states that each party shall accord non-discriminatory compensation for losses suffered
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during war, civil strife, national emergency or natural disaster. This provision is added to make the investor feel safe about his investments, thus encouraging business.
10. Denial of Benets:
Article 35 of the Model BIT permits the host state, at any time, to exclude certain investors from its benets. This may be for policy reasons such as security or diplomatic concerns. As with the Draft BIT, this provision states that it can be invoked “at any time”, not just at the outset of a dispute, which should help to avoid disputes over the timing of denial of benets, which has been an issue in past arbitrations.
11. Investor obligations:
The investor obligations in the Draft BIT regarding disclosures and the investor ’s obligation to maintain all records regarding the investment have been done away with as they make the entire process cumbersome thereby reducing investor condence. The Model BIT is more compact than the Draft BIT in terms of Investor Obligations.
CONCLUSION
India cannot maximize its economic growth, particularly in the infrastructure sector, without foreign investment and bilateral investment treaties play a signicant role in protecting foreign investors by the guarantees afforded therein.
The Model BIT aims to strike a balance between the interests of the state and the investor. Although the Model BIT is more balanced, certain clauses such as the exhaustion of remedies clause, removal of MFN and lack of a direct fair and equitable treatment clause might dampen the spirits of some investors. India needs to adopt a long term plan so as to enable itself to become one of the top investment destinations and also ensure that its interest are protected when negotiating any new BIT.
The present Model BIT should enable India to be in a better position to negotiate BITs with other countries and also enhance India’s reputation as a destination for FDI. The Model BIT will also give India some leverage in renegotiating BITs with countries as the Model BIT is more investor friendly. The nal text sets India on the course of fullling its promise to reduce red tape and bureaucracy thereby making it easier to do business in the country.
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Madras Petrochem Ltd. and Ors. v. BIFR and Ors.
In the case of Madras Petrochem Ltd. and Ors. v. 1BIFR and Ors., the Supreme Court adjudicated on the
interplay between the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”).
Facts:
Madras Petrochem Ltd. (“Appellant Company” or “Appellant”), having eroded its net worth entirely, led a reference under Section 15(1) of SICA, before the Board for Industrial and Financial Reconstruction (“BIFR”), for declaring the Appellant as a “sick” company. The BIFR made an inquiry under Section 16(1) of SICA which determines whether a company is sick. The BIFR declared the Appellant sick and appointed ICICI as the Operating Agency to formulate a rehabilitation scheme. Subsequent to that, two rehabilitation schemes were prepared and implemented, but both failed to restore the company's nancial health. Owing to this, and the fact that the company had been enjoying protection under SICA for the last 12 years, the BIFR ultimately made a recommendation to the High Court of Bombay to wind up the Company under Section 20(1) of SICA. Section 20 (1) allows the board to come to such a conclusion if the board is of the view that the sick company is “not likely to make its net worth exceed the accumulated losses within a reasonable time while meeting all its financial obligations and that the company as a result thereof is not likely to become viable in future and that it is just and equitable that the
company should be wound up”. This order of BIFR was challenged before and dismissed by the Appellate Authority for Industrial and Financial Reconstruction (“AAIFR”). The Appellant moved the Delhi High Court through a writ challenging the orders of AAIFR and BIFR. In January 2004, through an interim order, the Delhi High Court stayed both these orders, and later in July 2008 nally dismissed the writ petition by way of which the interim order was also vacated.
In the meantime, ICICI proceeded under the provisions of SARFAESI on behalf of all the secured creditors of the Company, and issued possession and thereafter sale notices in 2003. These notices were challenged by the Appellant before the DRT, DRAT and nally the Madras High Court, which upheld their validity.
Meanwhile, based on winding up proceedings by an unsecured creditor and another based on the recommendation of BIFR, the Bombay High Court wound up the Appellant. However, in November 2008, the Bombay High Court modied its order and restrained the Ofcial Liquidator from taking possession of the secured assets of the company, and permitted the creditors to pursue their remedies under SARFAESI.
The Delhi High Court while dismissing the writ petition in July 2008, was of the view that by virtue of Section 15(1) of SICA, since proceedings had been initiated under SARFAESI by secured creditors of the Appellant Company, the present proceedings under SICA stood abated. Appeal to the Supreme Court was led against this order of the Delhi High Court.
1 Supreme Court of India, Civil Appeal Nos. 614-615 of 2016 (Arising out of SLP (Civil) Nos. 26170-26171 of 2008), Decided On 29.01.2016
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Issues:
Based on the facts, the Supreme Court framed the following two questions:
(1) Whether provisions of SARFAESI prevail over SICA?
(2) Whether the expression "where a reference is pending" in proviso 3 of Section 15 (1) of SICA would include all proceedings before the BIFR or only proceedings at the initial referencestage? The third proviso to Section 15 (1) of SICA states “Provided also that on or after the commencement of the Securitisationand Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where a reference is pending before the Board for Industrial and Financial Reconstruction, such reference shall abate if the secured creditors, representing not less than three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measures to recover their secured debt under sub-section (4) of section 13 of that Act.”
Provisions:
The contention revolves around a few important provisions of the enactments:
1. Section 22 of SICA: This provision states that while a reference or inquiry is pending before BIFR or a sanctioned scheme is under implementation, other legal proceedings, contracts etc. against the company shall stand suspended, if they are undertaken without prior permission of BIFR. Thus, this provision gives an overriding effect to SICA above other laws.
2. Section 34 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“Recovery of Debts Act”): This provision states that provisions of this Act shall prevail over other Acts except a few (including SICA). The object of this was to clearly make SICA prevail over the Recovery of Debts Act.
nd3. Section 15(1) of SICA: The 2 proviso of this
Section states that where nancial assets have been acquired by any securitisation company or reconstruction company under SARFAESI, no reference shall be made to BIFR under SICA.
rdFurther, the 3 proviso, as quoted above states that “where a reference is pending” before BIFR, such reference shall abate if the secured creditors, representing not less than three-fourth in value of the outstanding amount, have taken any measures to recover their secured debt under SARFAESI.
4. Section 35 and 37 of SARFAESI: These provide that except certain specic Acts, SARFAESI has an overriding effect over all others.
Arguments:
For the rst issue, the Appellants submitted that regard being had to the object of SICA, it would override SARFAESI. For this purpose, he relied on the judgment in KSL and Industries Ltd. v. Arihant
2Threads Ltd., which held that SICA had overridden the Recovery of Debts Act and since the latter Act is a predecessor to SARFAESI and deals with the same subject matter, it would imply that SICA overrides SARFAESI as well. They further contended that since Section 37 of SARFAESI refers to the Recovery of Debts Act, and Section 34 of the Recovery of Debts Act refers to SICA, Section 37 of SARFAESI should also be construed to include a reference to SICA.
The Respondents on the other hand submitted that since the Recovery of Debts Act expressly referred to SICA in Section 34(2), SICA clearly overrode the Recovery of Debts Act. However, the corresponding section of SARFAESI, namely Section 37, specically omits any reference to SICA which makes it clear that the intention of the Legislature was to make SARFAESI prevail over SICA.
On the second issue, the Appellants contented that on rda true construction of the 3 proviso of Section 15(1)
of SICA, the expression "reference" would only include the initial stage of ling and registration of a reference before the BIFR. And since such a stage had passed long ago, the proceedings before BIFR were alive and not abated. On this issue the Respondents
2 (2015) 1 SCC 166
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submitted that various High Courts had taken the view that the expression "reference" would include all stages of a proceeding under SICA, including the stage of operation of a scheme. For this purpose, they relied heavily on the decision in M/s. Salem Textiles
3Limited v. The Authorized Officer and Ors.
Decision:
The Supreme Court held that both Acts are special in nature. While the purpose of one is to provide ameliorative measures for reconstruction of sick companies, the purpose of the other is to provide for speedy recovery of debts of banks and nancial institutions. The Court referred to various
4judgements where the application of SICA was compared to other special legislations, and it was held that the legislations enacted later in time will prevail over the earlier ones, unless provided otherwise. The reason being – had the Legislature intended to exclude the previous Act, it would have expressly provided so in the later Act. Further, the Court held that unlike Section 34 of Recovery of Debts Act, the corresponding provision of SARFAESI, namely Section 37, does not give overriding effect to provisions of SICA. This is reective of the Legislature's intention to impliedly exclude operation of SICA over SARFAESI. Thus, the new legislative scheme qua recovery of debts contained in SARFAESI has to be given precedence over SICA, unlike the old scheme contained in the Recovery of Debts Due Act.
Deciding on the second issue, the court stated that a large number of High Courts have taken the broad view that the expression "where a reference is pending" under proviso 3 of Section 15(1) of SICA would include all proceedings before the BIFR right till the stage of the culmination of a scheme for rehabilitation or the recommendation for winding up of the sick industrial company. However, a dissenting
5judgement of the Orissa High Court was also brought to light, which held that the expression "reference" would only refer to the initial stage of ling a reference before the BIFR and not to subsequent stages thereof, namely inquiry, preparation and
sanction of schemes. The Supreme Court overruled this judgement of the Orissa High Court and held that the present reference before the BIFR had abated by virtue of Section 15(1) of SICA.
Further, for the sake of clarity, the Court laid down the following guidelines:
1. Section 22 of SICA will continue to apply in the case of unsecured creditors seeking to recover their debts from a sick industrial company. This is because SICA overrides the provisions of the Recovery of Debts Act.
2. Where a secured creditor of a sick industrial company seeks to recover its debt in the manner provided by Section 13(2) of SARFAESI,such secured creditor may realise suchsecured debt under Section 13(4) of SARFAESI, notwithstanding the provisions of Section 22 of SICA.
3. In a situation where there is more than one secured creditor of a sick industrial company or it has been jointly nanced by secured creditors, and at least 60 per cent of such secured creditors in value of the amount outstanding do not agree to proceed under SARFAESI, Section 22 of SICA will continue to have full play.
4. Where, under Section 13(9) of SARFAESI, in the case of a sick industrial company having more than one secured creditor or being jointly nanced by secured creditors representing 60 per cent or more in value of the amount outstanding, wish to exercise their rights to enforce their security under SARFAESI, Section 22 SICA being inconsistent with the exercise of such rights, will have no play.
5. Where secured creditors representing not less than 75 per cent in value of the amount outstanding against nancial assistance, decide to enforce their security under SARFAESI any reference pending under SICA cannot be proceeded with, and the proceedings under SICA will abate.
3 AIR 2013 Madras 2294 Maharashtra Tubes Ltd. v. State Industrial And Investment (1993) 2 SCC 144; Solidaire India Ltd. v. Fairgrowth Financial Services Ltd. and Ors. (2001) 3 SCC 71; Jay Engineering Works Ltd. v. Industry Facilitation Council and Anr. (2006) 8 SCC 677.5 Noble Aqua Pvt. Ltd. v. State Bank of India, AIR 2008 Orissa 103
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Analysis:
This case establishes a landmark under the relevant laws by bringing clarity to the regime of recovery of debts. It ensures that defaulters with a malade intention are unable to avoid secured creditors under the garb of a SICA proceeding. It also brings to light the inclination of courts to balance the public interest involved in rehabilitation of sick industrial companies with that of the public interest involved in recovering debts due to banks and nancial institutions.
Vishal N. Kalsaria v. Bank of IndiaOrs.
The Supreme Court in the case of Vishal N. Kalsaria 1
vs. Bank of India & Ors. held that the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the “SARFAESI Act”) will not override the provisions of the Maharashtra Rent Control Act, 1999 (the “Rent Control Act”). In other words, the right of a tenant, regardless of whether the lease deed is registered or not, will be preserved in cases where the debtor-landlord secures a loan by offering the very same property as a security interest either to Banks or 'Financial Institutions' within the meaning of the SARFAESI Act.
Facts:
Respondent Nos. 4 and 5 (the “Landlords”) in this appeal, had approached the Bank of India (the “Respondent Bank”), Respondent No. 1 in this appeal, for a nancial loan, which was granted against equitable mortgage of several properties belonging to them, including the property in which the Appellant was a tenant. The Landlords defaulted in their payment of dues to the Respondent Bank and thus,
under the SARFAESI Act, their debt became a non-performing asset in the books of the Respondent Bank. The Respondent Bank served them a notice under the SARFAESI Act, and owing to the failure of the Landlords to settle their dues within 60 days of such notice, the Respondent Bank approached the Magistrate under the SARFAESI Act seeking possession of the mortgaged properties of the Landlords, the actual possession of which was with the Appellant. The Magistrate allowed the application and directed that the possession of the secured assets be taken by the Assistance Registrar.
Accordingly, Landlords served a notice on the Appellant asking him to vacate the premises within 12 days. However, fearing eviction, the Appellant approached the Court of Small Causes praying for an injunction restraining the Landlords from obstructing the possession of the Appellant over the suit premises during the pendency of the suit. This was granted by the Small Causes court. Consequently, the Appellant then led an application before the Magistrate as an intervenor to stay the execution of the order passed by the Magistrate.
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The Magistrate dismissed the application led by the Appellant by placing reliance on the case of Harshad Govardhan Sondagar v. International Assets
1Reconstruction Co. Ltd. and Ors . The Magistrate further held that when the secured creditor takes action under the SARFAESI Act to recover the possession of the secured interest and recover the loan amount by selling the same in public auction, then it is not open for the Court to grant an injunction under the Rent Control Act. The Magistrate also held that the order of the Small Causes Court cannot be said to be binding upon the Respondent Bank, especially since it was not a party to the proceedings. It is against this order of the Magistrate that the Appellant appealed.
Issue(s):
(i) Whether a 'protected tenant ' under the Maharashtra Rent Control Act, 1999 can be treated as a lessee; and
(ii) Whether the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 will override the provisions of the Maharashtra Rent Control Act, 1999.
Arguments:
The Appellant argued that it is a settled position of law that in the absence of a valid document of lease for more than one year or in case of an invalid lease deed, the relation of tenancy between a landlord and the tenant is still created due to delivery of possession to the tenant and payment of rent to the landlord and such tenancy is deemed to be a tenancy from month to month in respect of such property. Reliance was also placed on the Supreme Court decision of Anthony v.
2K.C. Ittoop & Sons and Ors. where it held that lease is a transfer of a right to enjoy the property and such transfer can be made expressly or by implication, the mere fact that an unregistered instrument came into existence would not stand in the way of the court to determine whether there was in fact a lease otherwise than through such deed. Thus, the tenancy of the Appellant in respect of the property in question which is the secured asset of the Bank being from month to month would also be protected under the provisions of
the Rent Control Act. According to the decision of the Supreme Court in Harshad Govardhan Sondagar, if a person claiming to be a tenant or lessee either produces a registered agreement or relies on an oral agreement accompanied by delivery of possession, then such tenancy/possession of the property with the Appellant as tenant needs to be protected.
The Respondents argued, by citing several decisions, that the SARFAESI Act is a special Act enacted by the Central Government with a special purpose and procedure laid down for the recovery of the secured assets of the debtor by the Bank in lieu of the amount due to it, and thus, any encroachment upon this Act should not be permitted, as it would defeat the laudable object of the Act, of larger public interest. Such encroachment is especially not permitted when the Appellant has not registered the instrument of lease. It was also argued that the non-obstante clause in the SARFAESI Act would not permit the Rent Control Act to override it. The Respondents also contended that in light of the decision of the Supreme Court in the case of Harshad Govardhan Sondagar, the present case is barred by res judicata. The Respondents further contended that since the suit property was mortgaged to the Bank prior to it being leased to the Appellant, the lessee would not be entitled to stop the bank from taking possession over the property which was mortgaged to it.
Judgment:
The Court rst looked at the object of both the statutes in question. The Court recognized that there is an interest of the bank in recovering non-performing assets on the one hand, and protecting the right of the blameless tenant on the other. The Court stated that the Rent Control Act seeks to prevent a landlord from arbitrarily evicting a tenant. By creating a security over the property in favour of the banks, the landlord is indirectly trying to do what he is not permitted to do directly. This, the Court said, would allow the landlords to scuttle the provisions of the Rent Control Act, and should not be permitted.
On the rst issue, the Court stated, by placing reliance on the Antony case, that if two parties are executing
1 (2014) 6 SCC 12 (2000) 6 SCC 394
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their rights and liabilities in the nature of a landlord-tenant relationship and if regular rent is being paid and accepted, then the mere factum of non-registration of deed will not make the lease itself nugatory. If no written lease deed exists, then such tenants are required to prove that they have been in occupation of the premises as tenants by producing such evidence in the proceedings under the SARFAESI Act before the Magistrate.
As regards the second issue, the Court said that the answer rests on the interpretation of Harshad Govardhan Sondagar. The Court stated that this decision cannot be read to mean that the provisions of the SARFAESI Act override the Rent Control Act. It held that the case only prescribes that if a mortgaged property is leased, consent of the creditor needs to be taken. It is silent on the aspect of registration of the lease. The Court also claried that the non-obstante clause in the SARFAESI Act does not mean that it overrides all other law. The non-obstante clause extends to only laws in the same eld, which the Rent Control Act is not. It further stated that if the non-obstante clause was given wide scope, it would not only violate the rule of law but also render a valid Rent Control statute enacted by the State Legislature in exercise of its legislative power under the Constitution of India useless and nugatory. The Court, in view of the federal structure envisaged by the
Constitution of India, stated that if the SARFAESI Act were to override the Rent Control Act, it would denude the legislative powers of the State Legislatures. Since this is not the intention of the SARFAESI Act, the court held that the SARFAESI Act does not override the Rent Control Act.
As regards the outstanding debts, the Court held that the rent amounts shall be paid by the Appellant to the Respondent Bank as an adjustment towards the debts of the Landlords.
Analysis:
This judgement is signicant for banks and nancial institutions which apply the procedure under the SARFAESI Act to enforce their security upon default of debtor-landlords. Since the banks and nancial institutions now cannot sell the properties which are leased in a public auction (as prescribed under the SARFAESI Act), they will need to be more mindful about the nature of the property given as security. They should also be wary of providing consent if a mortgaged property is being leased out. Background verication of the prospective tenants may now be an additional cost on the banks and nancial institutions.
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State of Rajasthan and Ors. v. Gotan Lime Stone Khanji Udyog P. Ltd._execution
In the case of State of Rajasthan and Ors. v. Gotan 1Lime Stone Khanji Udyog P. Ltd. and Ors the
Supreme Court applied the judicial tool of piercing the corporate veil to declare the transfer of mining leases illegal and void.
Facts:
M/s. Gotan Limestone Khanji Udhyog (“GLKU”), a partnership rm, held a limestone mining lease in Rajasthan and applied to the competent authority to transfer of the lease in favour of a private limited company M/s. Gotan Limestone Khanji Udhyog Pvt. Ltd. (“the company”). The company was merely a change of form from the partnership rm GLKU, where all the partners of the rm were the directors of the private company. The authority allowed the
thtransfer on 25 April 2012, on the basis that no illegal benet, price or premium was being received or taken from the transferee and all the rules and regulations would be complied with. In July 2012, the shareholding of the newly formed private company was acquired by Ultra Tech Cement Limited (“Ultra Tech”), allegedly for Rs. 160 crores and in August 2012, the private limited company was listed as a subsidiary of Ultra Tech. The authorities considered this an indirect transfer of the mining lease which appeared to be the main reason behind the acquisition, since such a transfer by the lessee was otherwise not permitted under law. Thus, a show cause notice dated April 21, 2014 was issued to the company asking why the transfer order should not be cancelled on this ground. In furtherance of the unsatisfactory response of the company, the competent authority declared the
transfer order as void in its order dated December 16, 2014.
The company led a writ petition in the Rajasthan High Court challenging the show cause notice and the order dated December 16, 2014. The challenge was on the ground that the company, being a distinct legal entity, was the owner of the mining lease and a change in shareholding and directorship of the company did not violate the Rajasthan Minor Mineral Concession Rules, 1986 (“the Rules”), while the state argued that the change of all the directors and shareholding amounted to an indirect transfer of the lease which
2was in violation of Rule 15 of the Rules, and thus the th
order dated 16 December 2014 was valid.
The single judge as well as the division bench of the Rajasthan High Court ruled in favour of the transaction on the grounds of the company being a separate legal entity and observed that change in directors or shareholding does not justify lifting of the corporate veil to make Ultra Tech the owner of the mining lease.
Against this dismissal, an appeal was made to the Supreme Court, to decide whether the transfer was valid or whether the corporate veil should be lifted to see the substance behind the transaction.
Arguments:
The appellants submitted that the general principle of a company's separate legal entity was subject to the doctrine of piercing the corporate veil. This doctrine is used to discover the real nature of a transaction when
1 Supreme Court of India, Civil Appeal No. 434 of 2016 (Arising out of SLP (Civil) No. 23311 of 2015), Decided On 20.01.20162 Rule 15 of the Rajasthan Minor Mineral Concession Rules, 1986 states that the lessee shall not without the previous consent in writing of the competent authority, assign, sublet, mortgage or in any other manner transfer the mining lease or any right, title or interest therein, or enter into or make any arrangement whereby the lessee may be directly or indirectly nanced to a substantial extent, by which the lessee’s operations or undertakings will be substantially controlled by any person or body of persons other than lessee.
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it is different from what is apparent. Since the acquisition took place immediately after the conversion of the partnership rm into a private company, it is evidence of the fact that the company itself was merely a device for transferring the mining lease to Ultra Tech. The real transaction was concealed so as to mislead the authorities.
On the other hand, the Respondents submitted that the acquisition involving transfer of shareholding and change of directors was independent of the transfer of lease, no express monetary consideration was involved, and even otherwise a transfer of lease was permissible on payment of dead rent/royalty and compliance of procedural formalities.
Decision:
By lifting the corporate veil, the Supreme Court overturned the ruling of the High Court and declared the transactions to be illegal. The Supreme Court observed that while independently both the transactions were legal and valid but together they were patently illegal, as the second transaction was merely a smokescreen for the sale of the mining lease to Ultra tech. The Supreme Court further observed that the corporate veil can be lifted in the name of public interest and to prevent the corporate entity from denying common good. The court held the lifting of the corporate veil “depends on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected etc.”
The Supreme Court further went on to add that the State is the only entity which can regulate the rights related to mines and minerals and they must do so in the best interest of the people. The court observed that “GLKPUL has been formed merely as a device to avoid the legal requirement for transfer of mining lease and to facilitate private benefit to the parties to the transaction, to the detriment of the public.”
Thus, the court reversed the decision of the High Court, and directed the State of Rajasthan to frame and notify its policy on transfer of mining leases within one month from the receipt of a copy of the Court's order.
Analysis:
Since the application of the doctrine for the rst time 3in Solomon v. Solomon & Co., the courts have come a
long way in dening the criteria and rationale behind lifting of corporate veil. Since this is mostly a judicial and non legislative function, the jurisprudence on this is highly varied. While in cases like Vodafone
4International Holdings BV v. Union of India, the Indian courts have dealt with international investment structures by companies, in the present case, the courts have willingly pierced the veil on the grounds of “public interest”.
The Supreme Court has laid sufcient emphasis on offering protection to activities undertaken for the common good, such as mining. This decision shall go a long way in determining the fate of cases based on circumvention of welfare legislations in the future.
3 [1896] UKHL 14 (2012) 6 SCC 613
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Reserve Bank of India and Ors.v. Jayantilal N. Mistry and Ors.
In the case of Reserve Bank of India and Ors. v. 1Jayantilal N. Mistry and Ors., the Supreme Court
discussed whether the Reserve Bank of India (“RBI”) and other Indian Banks can deny information under the Right to Information Act, 2005 (“RTI Act”) to the public at large on the grounds of economic interest, commercial condence, duciary relationship with other Banks, and public interest.
Facts:
Several applications were led before the Central Public Information Ofcer (“CPIO”) requesting the disclosure of information acquired by the RBI during its inspection of private and public banks or nancial institutions. This information was denied onthe ground that it was exempted under sections 8(1)(a), 8(1)(d) and 8(1)(e) of the RTI Act. These denials were challenged before the Central Information Commission (“CIC”), which directed the RBI to disclose the relevant details. Thereafter, the RBI approached the Bombay and Delhi High Courts through writ petitions which were eventually transferred to the Supreme Court on application.
Two main issues emerged from the arguments:
a. Whether the RTI Act being a general legislation can override certain specic legislations which contain provisions granting condentiality to the information obtained by the RBI?
b. Whether information sought under the RTI Act, can be denied by RBI and other banks to the public at large on the ground of economic interest, commercial condence and duciary relationship between RBI and other banks?
Arguments:
The Petitioner (RBI) made the following submissions:
1. The RBI in exercise of powers conferred under Section 35 of the Banking Regulation Act, 1949 (“BRA”) conducts inspection of the banks in the country. Section 28 of the BRA, allows RBI to publish the information obtained by it through such inspections, only in a consolidated form and not otherwise.
2. The role of RBI is to safeguard the economic and nancial stability of the country and it has a large contingent of expert advisors relating to matters deciding the economy of the entire country and
2nobody should doubt the bona de of the bank.
3. The Court should be highly cautious in interfering with the decision of RBI, as the economic policy is a function of experts.
4. While RBI recognizes and promotes enhanced transparency in public interest, a bank may not be able to disclose all data that may be relevant to assess its risk prole, due to the inherent need to preserve condentiality in relation to its customers. Thus, the benets of supervisory disclosure should be weighed against the risk posed to stakeholders, such as depositors.
5. As per the RBI policy, the reports of the annual nancial inspection, scrutiny of all banks / nancial institutions are condential documents which cannot be disclosed. Since these documents reect the RBI's (as the regulator)
1 Supreme Court of India, Transferred Case (Civil) No. 91 of 2015 & other related matters, Decided On 16.12.20152 The Petitioners referred to the case of Peerless General Finance and Investment Co. Limited and Anr. v. Reserve Bank of India, (1992) 2 SCC 343.
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critical assessment of banks and nancial institutions and their functions, their disclosure would create misunderstanding/misinterpretation in the minds of the public. Thus, it may prove counterproductive to the interests of the public, and adversely affect the economic interest of the State.
6. The RTI Act being a general legislation does not override the provisions of the BRA, the Reserve Bank of India Act, 1934 and the Credit Information Companies (Regulation) Act, 2005 (“CIC Act”), which protect the condentiality of the information sought. Further, since the CIC Act was enacted after the RTI Act, the condentiality provisions in it would override rights under the RTI Act.
7. Further, the exceptions under Section 8(1)(a), 8(1)(d) and 8(1)(e) of the RTI Act (which pertain to information prejudicial to inter alia the sovereignty or economic interest of India, information including commercial condence the disclosure of which would harm the competitive position of a third party or available to a person as a result of his duciary relationship) would also apply to disclosure by the RBI and banks.
On the other hand, the Respondents submitted that:
1. The most important value for the functioning of a healthy and well informed democracy is transparency, and all the agents of the public must be responsible for their conduct.
2. The RTI Act, as noted in its very preamble, does not create any new right but only provides machinery to effectuate the fundamental right to information given under Article 19 of the Constitution.
3. RTI Act contains a clear provision (Section 22) by virtue of which it overrides all other Acts including Ofcial Secrets Act. Thus, notwithstanding anything to the contrary contained in any other law like RBI Act or BRA, the RTI Act shall prevail insofar as transparency and access to information is concerned.
4. Moreover, the RTI Act 2005, being a later law, specically brought in to usher transparency and to transform the way ofcial business is conducted, would have to override all earlier practices and laws in order to achieve its objective.
5. Further, the exemptions sought by the RBI under Section 8(1)(a),(d) and 8(1) (e) of the RTI Act are inapplicable to the facts of this case and that the disclosure would be in public interest.
Decision:
On the issue of whether an exemption can be sought on the grounds of duciary relationship between RBI and other banks, the Court held that in reality, the RBI does not place itself in a duciary relationship with the nancial institutions because the reports of inspections, statements of the bank and information related to the business obtained by the RBI are not under the pretext of condence or trust. Further, RBI has no legal duty to maximize the benet of any public sector or private sector bank and thus there is no relationship of 'trust' between them. Since the RBI receives the information from banks and nancial institutions under statutory obligations, it cannot be considered to come under the purview of being shared in a duciary relationship. Furthermore, even if the Court considered that RBI and Financial Institutions shared a "Fiduciary Relationship", section 2(f) of the RTI Act would still make this information accessible
3by the public.
On the issue of economic interest, the Court held that economic interest of a nation is the goal which a nation wants to attain to full its national objectives. It is a part of our national interest, meaning thereby that national interest cannot be considered without considering economic interest. To bring transparency and accountability to a system, the citizens must be well-educated, well-informed and well-aware. If the customers of commercial banks will remain oblivious to the violations of RBI Guidelines and standards which such banks regularly commit, then eventually the whole nancial system of the country would be at a monumental loss. This can only be prevented by a
3 Section 2(f) clearly provides that the inspection reports, documents etc. fall under the purview of "Information" which is obtained by the public authority (RBI) from a private body.
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clear disclosure of such information to the general public. The Supreme Court thus held clearly in favour of disclosure over protecting a duciary relationship.
Analysis:
This judgement holds signicance since it allows for the disclosure of information in the banking industry heretofore withheld by the RBI on the grounds of condentiality. This includes the information
obtained by RBI during its regular inspections and audits from nancial institutions, and public and private banks. However, whether this move by the Supreme Court will bring further transparency and accountability to the industry remains to be seen. Further, this raises conicting concerns of an overbroad approach that may lead to compromising client information from the banks that RBI may have collected under the garb of “public interest”.
The Supreme Court vide its order dated 16.10.2015 1dismissed the Special Leave Petition led by the
Commissioner of Income Tax and upheld the judgment of the Delhi High Court in the case of
2Commissioner of Income Tax v. Subrata Roy in which it was held that the sum received by the assessee, Mr. Subrata Roy from his rm could not be treated as 'dividend' which would be taxable in the hands of Mr. Roy under section 2(22) (e) of the Income Tax Act, 1961. Such a position was conrmed, regardless of the fact that the rm was indebted to SISCOL, in which Mr. Roy was the managing director.
Section 2(22)(e) of the Income Tax Act, 1961 states that any payment by a company not being a company in which the public are substantially interested, by way of advance or loan to a shareholder, being a person who is the benecial owner of shares holding not less than ten percent of the voting power, or to any
3concern in which such shareholder is a member or a partner and in which he has a substantial interest or any payment by any such company on behalf, or for
the individual benet, of any such shareholder, to the extent to which the company in either case possesses accumulated prots, is to be taken as 'dividend'.
FACTS
Subrata Roy ( hereinafter referred to as the “Assessee” or “Mr. Roy”) was the managing director of Sahara India Savings and Investment Corporation Ltd. (hereinafter referred to as "SISICOL"). He was also a partner of M/s. Sahara India (hereinafter referred to as the "rm"). Under an Agreement dated August 17, 1987, the rm was to act as an agent for the SISICOL and undertake certain business activities on behalf of SISICOL. In the course of such business, the rm had collected an amount of approximately Rs. 26 crore through several schemes of SISICOL and was required to remit this amount to SISCOL at a future point in time. Between 1991 and 1992, the rm advanced Rs. 1.8 crore to Mr. Roy. The Assessing Ofcer (AO) held that this amount was to be treated as
1 SLP Nos (C) 18598/18599 of 20152 (2015) 278 CTR (Del) 1763 The Finance Act, 1987 added an explanation to the said clause which dened a ‘concern’ as a HUF, or a rm or an association of persons or a body of individuals or a company.
Commissioner ofIncome Tax v. Subrata Roy
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a loan from SISICOL to the assessee and would thus attract section 2(22)(e) of the Income-tax Act, 1961 since it was alleged that the use of the rm was merely to act as a conduit so that monies could ultimately be received by Mr. Roy. The amount of Rs. 1.8 crore being a loan out of SISICOL's accumulated prots to Mr. Roy, it was treated as "deemed dividend” under Section 2(22) (e) of the Income-tax Act, added to the assessee's income and thus treated as taxable.
On appeal, the Commissioner of Income-tax (Appeals) – ("CIT (A)”) held that SISICOL had advanced sums to the rm as a concern in which the assessee (and shareholder of SISICOL) had a substantial interest (as a partner of such rm). On this basis, the decision of the AO was upheld.
The assessee appealed to ITAT against the decision of CIT (A) and the ITAT held that the loan of Rs. 1.8 crores given by the rm to the assessee could not be treated as an “advance” out of the amount of Rs. 26 crores payable by the rm to SISICOL. The basis of such a nding was that the rm had enough funds from other sources and that therefore this amount of Rs. 1.8 crores could not be treated as a part of the credit balance of Rs. 26 crores. Accordingly, the ITAT held that the said amount of Rs. 1.8 crores was not in fact deemed dividend under section 2(22)(e) of the Income Tax Act, 1961. The majority held that the corporate veil could not be lifted in the facts of the case. It was observed that the credit balance of Rs. 26.2 crore was retained by the rm in the usual course of business and represented collection for the previous two months. The collection exceeded on average Rs. 10 crore per month. Consequently, it could not be inferred that amount retained by the rm was for the assessee's benet.
This was the decision of the majority of the ITAT whereas The Accountant Member came to a contrary nding.
The Delhi High Court upheld the decision of the ITAT and dismissed the appeal of the CIT and ultimately even the Supreme Court refused to interfere with the Delhi High Court order.
ARGUMENTS ADVANCED BEFORE THE DELHI HIGH COURT
The revenue placed heavy reliance on the reasoning of the accountant member of the ITAT arguing that the assesse controlled the activities of all companies and rms of the Sahara group and was also the main person behind the activities. The revenue argued that as the managing director of SISICOL, the assessee controlled the activities of all concerns. It was argued that the rm was a mere front for routing the money directly to Mr. Roy. The revenue further argued that SISICOL had share capital of Rs. 2.9 crores and a surplus of close to Rs. 1.8 crore which further corroborated the argument that this amount had its source in the Rs. 26 crores credit balance of SISICOL. It was further argued that Section 2 (22) (e) enacts a deeming ction and that therefore in such cases the amounts owing from SISCOL to the assessee through the rm should be characterized as such.
The revenue authorities relied on the judgment of the Supreme Court in Commissioner of Income Tax v
4Mukundray K Shah wherein the court held that the main reason for enacting section 2 (22) (e) was to prevent the controlling group of the company from not paying taxes on accumulated prots of the company by adopting a device of advancing the said prots by way of loans to one of its shareholders. The revenue authorities also relied on the case of
5Commissioner of Income Tax V National Services and urged that in similar circumstances, partners of the rm were held to have received advances and subjected to tax under Section 2 (22) (e).
Counsel for the assessee on the other hand urged the court to uphold the ITAT majority view. It was argued that the credit balance of Rs. 26 crore ought to be characterized as a “trade debt” as opposed to an “advance” or a “loan” since the same was not a loan and there was no outow of money from SISICOL to the shareholder (Mr. Roy) directly. It was therefore stressed that to invoke the provisions of the section, the revenue would have to prove that the money was advanced by SISICOL to the rm purely for payment to the assessee. Relying on the ITAT's decision, the assess argued that the relationship between SISICOL and the rm would be that of a borrower and a creditor 4 [2007] 290 ITR 433
5 [2012] 347 ITR 3056 1972 (83) ITR 70 (SC)
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in respect of a trade debt and not one of a borrower and a lender. Thus in the absence of a factual nexus between the two amounts, the section (which ought to be strictly construed) would not be attracted.
DECISION
The Delhi High Court referred to the case of Commissioner of Income Tax v. C.P Sarathy
6Mudaliar wherein the Supreme Court stated “that only the person whose name is entered in the register of the shareholders of the company as the holder of the shares can be considered as a shareholder qua the company and not the person benecially entitled to the shares…[I]t is only where a loan is advanced by the company to a registered shareholder, can it be considered as a deemed dividend.” The court stated that it is undisputed that the payments were not made to the assessee by the company nor were such payments made to a shareholder. The money was paid by the rm to the assessee.
The court refuted the argument that both the transactions were in effect a single one and stated that the fact that the assessee had sufcient control over the Sahara business does not mean that the two transactions are the same. The court observed that the revenue authorities had to probe further and establish based on the material before it that the payment was a part of a tax evasion ruse. The court found no error of fact that the rm had advanced Rs. 1.8 crores out of total independently available funds of more than Rs. 60 crores. The court stated that the rm had a separate legal existence of its own and had collected
7 [2012] 340 ITR 148 A.V Fernandez V State of Kerala 1957 1 [SCR] 837
substantial amounts through signicant commercial activity and thus this payment was not routed through SISICOL.
The Delhi High Courtalso referred to Commissioner 7of Income Tax v Ankitech Pvt Ltd wherein the
Supreme Court held that legal ction created by the said section does not extend to shareholders and it only extends to dividends. The Apex Court added that the legal ction created cannot be extended further for broadening the concept of the term “shareholders”. In these circumstances at least, it could not have been said that the loan to the assessee and the loan (in the form of credits in favour of SISICOL) were really one transaction. Thus no tax was payable by the assessee.
ANALYSIS
It is trite law that tax statutes are to be strictly 8construed. Keeping this principle in mind, the order
of the Supreme Court upholding the judgment of the Delhi High Court lays down the correct position as the assessee can only be taxed under the said section if he falls within the specic parameters of the given provision. The assessee does not fall within the limits of the section as the money was not paid to the assessee by the company nor was it paid to him in the capacity of a shareholder and the law prohibits expansion of the denition of a shareholder. On the other hand, it may be argued that such a structure is merely a smokescreen for evasion of tax, especially if the same individual is in control of all the entities. Even so, this decision is instructive in the realm of how tax statutes are to be interpreted.
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Legal Updates
1. The Arbitration and Concil iation (Amendment) Act , 2015 promulgated
st On 31 December, 2015, the President of India promulgated the Arbitration and Conciliation (Amendment) Act, 2015 to bring about a number of reforms to the present Arbitration and Conciliation Act, 1996.
rd The amendments are effective from 23 October, 2015, and give legislative sanction to the generally pro-arbitration policy adopted by Indian courts. Some of the key amendments include recourse to Indian courts for interim relief even in respect of foreign seated arbitrations, the introduction of various timelines to speed up the arbitral process and clarications in relation to the much used and oft abused public policy challenge in relation to setting aside and enforcement of arbitral awards.
2. The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts, Act, 2015 promulgated
st On 31 December 2015, the President of India
p romulga t ed t he Commerc i a l Cour t s , Commercial Division and Commercial Appellate Division of High Courts Act, 2015 to establish special commercial courts to deal with commercial matters in each High Court. In compliance with the Act, the Delhi High Court has initiated the procedure to transfer all commercial matters to the respective Commercial Divisions / Commercial Appellate Divisions.
The Act establishes commercial courts to adjudicate commercial disputes of specied value (over INR 10 million), and matters connected therewith, including incidental amendments of the Code of Civil Procedure, 1908. Additionally, all applications in relation to international commercial arbitrations (i.e. where at least one foreign party is involved), will be heard by the Commercial Division of the relevant High Court (subject of course to meeting the specied value).
3. Real Estate ( Regulation & Development), Act 2016
The Real Estate (Regulation & Development) Act, 2016, passed by both the houses of the Indian Parliament, received the assent of the President
thof India on 25 March, 2016. The Act repealsthe Maharashtra Housing (Regulation and Development) Act, 2012. The Act mandates setting up of Real Estate Regulatory Authorities (RERAs) at the State level for the regulation and development of real estate sector. It aims at ensuring consumer protection, standardisation in business practices and transactions in the real estate sector. The new Act regulates both commercial and residential projects. This Act provides for mandatory registration of real estate projects with the RERA where the total area of land proposed to be developed exceeds 500 square meters or where more than eight apartments are proposed to be developed inclusive of all phases. The Act also provides for speedy resolution of complaints and disputed by
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the regulatory authorities such as RERAs and the real estate appellate tribunals. The Act further provides that 70 percent of the booking amount shall be deposited by the promoter in an escrow account to meet construction needs. Further Section 13 of the Act provides that the promoter shall accept only up to 10% of the apartment cost prior to entering into a written agreement for sale with the consumer. The Act imposes monetary penalties on the promoter of up to 5% of the estimated cost of the project, as determined by the RERA, for disclosure related defaults, and up to 10% for other defaults, along with a maximum imprisonment of 3 years and incase of consumers failing to comply with or contravening any orders of the real estate appellate tribunal, they shall be punishable with imprisonment for a term which may extend upto 1 year. This Act largely seeks to protect the interest of the consumers by seeking to promote transparency, accountability and efciency in the construction and execution of real estate projects by the promoters.
4. The Mines and Minerals (Development and Regulation) Amendment Bill, 2016
The Lok Sabha passed the Mines and Minerals (Development and Regulation) Amendment Bill,
th2016 on 16 March, 2016 to further amend the Mines and Minerals (Development and Regulation) Act, 1957. The Bill inter alia seeks to add a proviso to section 12A (6) of the principal Act. The proviso allows for transfer of captive mining leases granted otherwise than through auction route subject to such terms and conditions or transfer charges as may be prescribed, in order to facilitate legitimate business transactions. This proviso shall allow merger and acquisition of companies with captive mining leases. Explanation to the said proviso has dened captive purpose as the use of entire quantityof mineral extracted in the lessee’s own manufacturing unit. Such lease transfers will be subject to terms and conditions, and transfer charges a prescribed by the Central Government.
5. Appointment of Chief Justice of Bombay High Court
Chief Justice of the Orissa High Court D.H. Waghela was sworn in as the new Chief Justice of
ththe Bombay High Court on 15 February, 2016. He succeeds Chief Justice Mohit Shah, who
thretired on 8 September, 2015.
6. Other High Courts
Justice Ajit Singh of Rajasthan High Court was appointed as the Chief Justice of Gauhati High
thCourt on 5 March 2016; Justice Dinesh Maheswari of the Allahabad High Court was appointed as the Chief Justice of Meghalaya
th High Court on 24 February, 2016; Justice Vineet Saran of Karnataka High Court was appointed as
th Chief Justice of Orissa High Court on 26February, 2016; Justice R. Subhash Reddy of the Andhra Pradesh / Telangana High Court was appointed as Chief Justice of Gujarat High Court
thon 24 February, 2016; Justice S. K. Mukherjee of the Karnataka High Court was appointed as Chief Justice of the Karnataka High Court; Justice S. K. Mittal of the Punjab & Haryana High Court was appointed as Chief Justice of the Rajasthan High
thCourt on 5 March, 2016.
7. Appointment of retired Supreme Court Judges
Former Chief Justice of India, Justice H. L. Dattu has been appointed as the chairman of National
thHuman Rights Commission on 29 February, 2016.
DISCLAIMER:
This newsletter has been sent to you for information purposes only and is intended merely to highlight issues. The information and/or observations contained in this newsletter do not constitute legal advice and should not be acted upon in any specific situation without appropriate legal advice.
The views expressed in this newsletter do not necessarily constitute the final opinion of Cyril Amarchand Mangaldas and should you have any queries in relation to any of the issues set out herein or on other areas of law, please feel free to contact us on [email protected] or write to following coordinates:
Cyril Shroff Managing Partner
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Peninsula Chambers, Peninsula Corporate Park, GK Marg, Lower Parel, Mumbai - 400 013, IndiaTel.: +91 22 2496 4455 Fax:+91 - 22 2496 3666
Other offices: New Delhi, Bangalore, Hyderabad, Chennai and Ahmedabad
Shaneen Parikh Partner
CONTRIBUTORS TO THIS CIP ARE:
1. Shaneen Parikh
2. Shalaka Patil
3. Namita Shetty
4. Ramola Nayanpally
5. Preena Salgia
6. Amitabh Tewari
